Peter: Japan – What Do Markets Want?
So let me get this straight, on January 29th the BoJ surprised markets by moving to a negative interest rate of .1% on bank deposits and the move completely back fires as the yen goes from 121 to 108 in the following months. The Nikkei cracks by 15% in two weeks. The only beneficiary were JGB’s. The BoJ then decides overnight not to push deeper with this policy in a show of patience to see how the January move plays out and maybe not to panic the markets again and the yen rips further and the Nikkei falls almost 4%. The pain trade in particular from January were in the Japanese banks due to the crushing of their margins and the penalty rate so what does Mitsubishi UFJ do overnight on a pause in negative rate policy, it falls 6% on top of the 5% drop in the two prior days. Mizuho Financial plunged by 6.5%. I GIVE UP! JGB’s had the muted but mixed response as the 10 yr yield rose 2.5 bps while the 30 yr yield fell by 5.5 bps.
Bottom line, markets are now behaving worse than spoiled little children as now it’s getting even tougher to gauge what they really want from our central bankers that are losing credibility with their monetary reputations every day. I’ll venture to guess that many are realizing that we are at the end of the road in this cycle of modern day monetary extremism notwithstanding Kuroda’s belief that he doesn’t “think there are limits to monetary policy measures.” For the action in Japanese banks today, investors were likely disappointed the BoJ didn’t go the way of the ECB in paying them to lend. Got gold?
Japan also reported important economic data overnight. Headline CPI for March fell .1% m/o/m vs the estimate of unchanged. The core rate was higher by .7% y/o/y, also one tenth less than expected and down from .8% in February. The core rate has been in a .7-.9% range for the past 8 months which is the highest level since the late 1990’s not including the VAT related spike in ’14-‘15. The BoJ doesn’t realize that inflation is a symptom, not the disease.
The Japanese unemployment rate fell one tenth to 3.2%, matching the lowest level since 1997 but the composition was not good as the number of employed fell by 130k and 180k left the labor market. The jobs to applicant ratio rose to 1.30 vs the estimate of 1.28 and that is the most since 1991. The labor market is tight as a drum based on this figure but the mix remains an issue due to the many part timers who face off against the entrenched full timers.
Overall household spending in Japan in March fell 5.3% y/o/y, worse than the estimate of down 4.1%. Industrial production on the other hand improved by 3.6% m/o/m in March which was better than the forecast of up 2.8%. The economic data out of Japan today remains very uneven.
As for the Fed after yesterday’s statement, I’ll say to them: Your mandate isn’t to have a perfect world. That only exists in fairly tales, dreams and in your econometric models.